Treasury boss Steven Kennedy has urged banks to go easy on borrowers who have deferred loans during the pandemic, claiming a house price crash is a distinct possibility.
As the first wave of home owners near the end of their six-month deferrals, Dr Kennedy said banks would need to show “forbearance” to cash-strapped customers to avoid a surge in foreclosures and discounted sales.
But property experts have hit back – claiming deferrals kick the can down the road and deflect responsibility from the federal government.
Speaking during an Institute of Public Administration Australia podcast, Dr Kennedy said banks should be “nimble” in their response to new hurdles during the pandemic, including Victoria’s second lockdown.
Despite almost 300,000 borrowers having resumed repayments on deferred loans, Dr Kennedy said the banking sector must tread carefully before asking more customers to end their mortgage holidays.
“For those sectors that remain very badly affected, it’s going to have to be a very careful adjustment and almost some forbearance and a continuing watching of circumstances,” Dr Kennedy said.
His suggestion comes as banks continue assessing clients who have reached the end of their six-month deferral period.
According to data from the Australian Banking Association, 20 per cent of the 900,000 people who deferred loans had resumed full or partial repayments by the end of July, and another 100,000 resumed repayments in August.
At the same time, house prices over the past three months fell by 3.5 per cent in Melbourne and 2.1 per cent in Sydney.
Speaking in the same podcast, Commonwealth Bank CEO Matt Comyn said he believes the banking sector had, by extending mortgage holidays for some customers, averted a dreaded “fiscal cliff” that would have coincided with tapered stimulus payments.
“There’s enough flexibility … within the commercial system and with the regulators to at least provide up to another four months around repayment deferrals going into calendar 2021,” Mr Comyn said.
However, University of Melbourne professor in property Piyush Tiwari said Dr Kennedy’s stance neglected the burden deferrals place on home owners by “making future loan repayments higher or elongating the life of the loan”.
Instead, the responsibility should shift to the federal government to provide targeted relief to low- and middle-income households struggling to meet repayments on their principal place of residence, Dr Tiwari said.
“Should we continue intervening in some parts of market too much? I think the answer to that is no. We should let them eventually correct itself, there’s no doubt about that,” Dr Tiwari told The New Daily.
“Investors holding onto properties with large – and sometimes multiple – mortgages have seen major drops in rental income with many renters on JobKeeper and JobSeeker, and that market was already in a weaker situation with hardly any migrations happening.
“But the market at the lower end needs to be supported in some way.”
AMP Capital chief economist Shane Oliver said the banks face a difficult task deciding whether to exercise forbearance or begin having difficult conversations with “zombie borrowers” – customers that have no chance of repaying loans when support ends.
But Dr Oliver said it’s hard to see where the government could possibly intervene, because it would likely have to be done on a case-by-case basis.
“It’s all a big balancing act,” Dr Oliver told The New Daily.
“There has to be some sort of crunch point where a decision is made as to whether the loan can be serviced or repaid and returned to normal servicing, or whether things have to be wound down.”
Canstar finance expert Steve Mickenbecker told The New Daily support measures, including loan deferrals, had slapped a bandaid on vital sectors of the economy and left them prone to “nightmare scenarios” once the support was withdrawn.
In this case: A potential double-digit decline in house prices that could weigh on our economic recovery.
“The wealth effect is felt first as home values decline, and the reality is that it puts us at high risk,” Mr Mickenbecker said.
“Australians have long been one of the most heavily borrowed groups individually in the world, and that’s because we have always viewed property as something that always goes up, and if it goes down, it typically recovers quickly.
“If you can see your equity keeps on rising by $30,000 to $50,000 a year, you feel comfortable about going on overseas trips and buying cars because your wealth is taking care of itself.”
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